Ruling Islamic militant group Hamas says a planned Palestinian unity government would not recognise Israel or accept a two-state solution to the Middle East conflict.

The stance could undercut Palestinian efforts to ease an eight-month-old western economic boycott by forming a unity Cabinet more acceptable to Israel and the United States.

The US, the European Union (EU), Russia and the United Nations imposed the boycott to pressure Hamas, which took control of the Palestinian Authority in March, to recognise Israel's right to exist, renounce violence and accept existing peace deals.

Hamas spokesman Fawzi Barhoum says the program of the proposed unity government between Hamas and Palestinian President Mahmoud Abbas's Fatah faction will reject some of those demands.

"We reject the two-state solution, which is the vision of US President George Bush, because it represents a clear recognition of Israel," Mr Barhoum said.

"Our position in this regard remains unchanged. We reject joining in any government that recognises Israel."

The US and the European Union regard Hamas as a terrorist organisation and have cut off direct aid to its administration.

As a result, the Palestinian government has largely been unable to pay its 165,000 workers since April.

The head of Israel's Shin Bet security service, Yuval Diskin, has meanwhile told a parliamentary committee that Israel should be prepared to widen its military operations in Gaza because of the growing strength of Hamas and other militant groups.

Last week, 19 Palestinian civilians were killed in an Israeli artillery barrage on the Gaza town of Beit Hanoun. Israel said the barrage was caused by a technical failure.

Previous attempts to form a Palestinian unity government have stalled because Fatah and Hamas, whose charter calls for Israel's destruction, could not agree on language for a platform that satisfies both Hamas and western powers.